SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): March 1, 1995
CONE MILLS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
North Carolina 1-3634 56-0367025
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
INCORPORATION) IDENTIFICATION NO.)
1201 Maple Street, Greensboro, North Carolina 27405
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's Telephone Number, Including Area Code: (910) 379-6246
ITEM 5. OTHER EVENTS.
The following consolidated financial statements of the Registrant and
related notes and management's discussion and analysis are filed herewith on the
pages indicated.
PAGES
Management's Discussion and Analysis of Results of Operations and Financial Condition.................................. 2
Independent Auditor's Report........................................................................................... F-1
Consolidated Statements of Income for the years ended January 1, 1995, January 2, 1994 and January 3, 1993............. F-2
Consolidated Balance Sheets as of January 1, 1995 and January 2, 1994.................................................. F-3
Consolidated Statements of Stockholders' Equity for the years ended January 1, 1995, January 2, 1994 and January 3,
1993................................................................................................................. F-4
Consolidated Statements of Cash Flows for the years ended January 1, 1995, January 2, 1994 and January 3, 1993......... F-5
Notes to Consolidated Financial Statements............................................................................. F-6
ITEM 7.
The following exhibits are filed in connection with this report.
EXHIBIT NO. DESCRIPTION
2.1 Amendment to Receivables Purchase Agreement dated April 4, 1994 between the Registrant and Delaware
Funding Corporation
2.2 Amendment to Receivables Purchase Agreement dated June 7, 1994 between the Registrant and Delaware Funding
Corporation
2.3 Amendment to Receivables Purchase Agreement dated June 30, 1994 between the Registrant and Delaware
Funding Corporation
2.4 Amendment to Receivables Purchase Agreement dated November 15, 1994 between the Registrant and Delaware
Funding Corporation
4.1 Amended and Restated Credit Agreement dated November 18, 1994, among the Registrant, various banks and
Morgan Guaranty Trust Company of New York, as Agent
4.2 Letter Agreement dated September 11, 1992, amending the Note Agreement dated August 13, 1992 between the
Registrant and The Prudential Insurance Company of America
4.3 Letter Agreement dated July 19, 1993, amending the Note Agreement dated August 13, 1992 between the
Registrant and The Prudential Insurance Company of America
4.4 Letter Agreement dated June 30, 1994, amending the Note Agreement dated August 13, 1992 between the
Registrant and The Prudential Insurance Company of America
4.5 Letter Agreement dated November 14, 1994, amending the Note Agreement dated August 13, 1992 between the
Registrant and The Prudential Insurance Company of America
23.1 Consent of McGladrey & Pullen, LLP
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The operating results and financial condition of Cone have been influenced
by a number of external factors and Company initiatives. The principal
influences have been domestic cotton costs, the general business cycle,
international apparel and fabric trade developments, and strategic changes in
the Company's business and capital structure.
COTTON COSTS. Management believes that the most significant factor
affecting operating margins has been the price of cotton, the Company's
principal raw material. Cotton prices fluctuate with the balance of supply and
demand and, since cotton is an agricultural product, its supply and quality are
subject to the forces of nature. World cotton prices began to rise in late 1993,
throughout 1994 and into 1995, primarily as a result of cotton crop declines in
Pakistan, India and China due to weather, disease and insects. Consequently,
mill delivered cotton prices per pound rose from the lower $.60's in 1992 and
1993 to the upper $.70's in 1994 and into the mid $.80's during early 1995.
The Company has purchased cotton from suppliers at fixed prices for
delivery throughout 1995. Although these fixed prices compare favorably with
those of the present spot market, the significant increase in the price of
cotton since late 1994 will cause a reduction in profit margins in 1995. While
the Company was unable to increase prices in its major product lines during the
first half of 1994, moderate price increases were effected for the second half
of 1994 and first quarter 1995. Margins will be affected by the strength of
demand for the Company's products and the resulting impact on improved pricing,
cotton and other raw material costs, and productivity improvement programs.
GENERAL BUSINESS CYCLE. The Company's operating results are closely related
to the general business cycle of the U.S. economy. Management believes the U.S.
economy is currently in the mature phase of the economic cycle, when the demand
for home furnishings and consumer durables typically grows at a higher rate than
demand for apparel products, which is usually strongest in the earlier phases of
a recovery. When apparel demand growth rates change during an economic cycle,
adjustments to inventories and production levels often occur. In early 1994,
despite continued strong demand at retail, denim inventories experienced an
inventory imbalance in the softgoods pipeline. The pipeline supply and demand
imbalance was corrected by the second half of 1994.
The external factors discussed above are reflected in the Company's recent
quarterly net sales. All quarters had 13 weeks except the fourth quarter of 1992
which had 14 weeks.
1994 1993 1992
(IN MILLIONS)
Net Sales:
1st Quarter................................................ $195.9 $195.0 $174.2
2nd Quarter................................................ 201.7 202.5 182.6
3rd Quarter................................................ 203.5 192.7 170.5
4th Quarter................................................ 205.1 179.0 178.1
Total................................................... $806.2 $769.2 $705.4
TRADE DEVELOPMENTS. The Company's operating results have been influenced by
U.S. trade policy, which has allowed gains in market share by foreign-produced,
labor-intensive garments over the past decade. This has caused U.S.
manufacturers of fabrics used in these labor-intensive garments to have excess
capacity, which has resulted in increased competition and reduced margins for
U.S. manufacturers of commodity-type goods. In December 1994, Congress approved
implementing legislation for the Uruguay Round world trade accord under the
General Agreement on Tariffs and Trade ("GATT"). As a result, quotas will be
phased out and tariffs outside of the U.S. on textile and apparel products will
be substantially reduced over a period of 10 years. U.S. tariffs on these
products will be reduced slightly. The passage of the North American Free Trade
Agreement ("NAFTA") has essentially eliminated all quotas and tariffs on the
Company's products throughout Canada and Mexico. In response to this
environment, the Company has focused on high-margin and low-labor content
businesses in which it believes it is internationally competitive.
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STRATEGIC INITIATIVES. The Company has adopted a growth strategy aimed at
entering new markets that utilize manufacturing technologies related to existing
Cone strengths. For example, in 1993, the Company positioned itself to supply
markets more efficiently and effectively with basic denim products through the
purchase of a 20% equity ownership interest in CIPSA for approximately $24
million and the formation of a joint venture with CIPSA to construct a modern
denim plant in Mexico. The joint venture partners will invest approximately $50
million in equity in the venture, with each partner providing one-half of the
investment. Capital requirements for the joint venture will primarily occur in
1995. The joint venture also obtained a $63 million credit facility from a
Mexican bank. This facility is not guaranteed by Cone or by CIPSA.
In 1994, the Company further implemented its growth strategy by acquiring
substantially all of the assets of Golding Industries, Inc., consisting
primarily of the Raytex division, for a purchase price of $57.6 million in cash
and the assumption of $6.0 million in liabilities. Raytex is a leading
commission printer of wide fabrics used primarily in home furnishings products
and uses technologies similar to Cone's Carlisle facility, which also prints and
finishes decorative fabrics.
As part of its strategy, the Company has made significant capital
expenditures in recent years and plans to spend a total of $62 million in fiscal
1995, including $15 million for a new plant to weave jacquard pattern fabrics
for home furnishings customers. In January 1995, the Company also purchased
substantially all of the assets of Greeff Fabrics, Inc., a small but well known
designer and distributor of high-end decorative fabrics to interior designers
and specialty retailers in the U.S. and the United Kingdom. The new jacquard
pattern fabrics plant and Greeff Fabrics, Inc. will be part of the Cone
Decorative Fabrics Division formed in January 1995.
SEGMENT INFORMATION
Cone operates in two principal business segments, apparel fabrics and home
furnishings products. The following table sets forth certain net sales and
operating income information regarding these segments for 1994 and 1993, both of
which contained 52 weeks, and 1992, which contained 53 weeks.
1994 1993 1992
(DOLLAR AMOUNTS IN MILLIONS)
Net Sales
Apparel................................................. $600.5 74.5% $575.8 74.9% $520.0 73.7%
Home Furnishings........................................ 205.7 25.5 193.4 25.1 185.4 26.3
Total................................................ $806.2 100.0% $769.2 100.0% $705.4 100.0%
Operating Income (1)
Apparel................................................. $ 47.5 7.9% $ 68.8 12.0% $ 67.4 13.0%
Home Furnishings........................................ 19.0 9.2 19.5 10.1 16.3 8.8
(1) Operating income excludes general corporate expenses. Percentages reflect
operating income as a percentage of segment net sales.
RESULTS OF OPERATIONS
FIFTY-TWO WEEKS ENDED JANUARY 1, 1995 COMPARED WITH FIFTY-TWO WEEKS ENDED
JANUARY 2, 1994
Net sales for 1994 were $806.2 million, up 4.8% from 1993 net sales of
$769.2 million. Income before the cumulative effect of adoption of SFAS No. 112
was $36.2 million, or $1.20 per share after preferred dividends, as compared
with $49.6 million, or $1.68 per share, for 1993. Included in the 1994 results
was a net gain of $.4 million, or $.01 per share, arising from the final
disposal of assets of the Company's discontinued operations. During the first
quarter of 1994, the Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," which resulted in an after-tax, non-cash charge of
$1.2 million, or $.04 per share, and reduced net income to $1.16 per share for
the year of 1994. Net income for 1994 was $35.0 million as compared with $49.6
million for 1993.
Gross profit (net sales less cost of sales and depreciation) as a
percentage of net sales was 17.4% in 1994 as compared with 20.7% for 1993. The
decline resulted primarily from the inability to raise denim prices to cover
higher cotton costs, higher unit production costs associated with operating
denim facilities at less than capacity during the first six months of 1994, and
a higher proportion of the mix in lower margin speciality sportswear fabrics and
polyurethane foam products as a result of stronger sales of those products.
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APPAREL FABRICS. Apparel fabrics net sales were $600.5 million for
1994, an increase of 4.3% from 1993. The higher sales were due to increased
sales volume. Overall, apparel fabric segment sales benefited from
increases in specialty sportswear sales, primarily flannel shirtings, and
to a lesser extent, increases in heavyweight denim sales. Average prices
adjusted for product mix changes were essentially unchanged. Apparel
fabrics export sales for 1994 were up 8.8% to $135.9 million from $124.9
million in 1993.
Operating margins in 1994 for the apparel fabrics segment were 7.9% of
net sales compared with 12.0% for 1993. Margins were lower in 1994 because
of the decline in denim earnings as discussed above.
HOME FURNISHINGS. Home furnishings net sales were $205.7 million in
1994, an increase of 6.3% from 1993. Operating income for 1994 was $19.0
million, a decrease of 2.6% from 1993. Sales and operating income for the
home furnishings fabrics product group were down in 1994 as the Company
continued to experience weak decorative print fabric markets. Olympic's
polyurethane product sales were up in 1994 as the division experienced
stronger sales in automotive markets, but operating income was down as
margins on commodity furniture foam and carpet underlay continued to be
weak and as the division absorbed start-up costs associated with new
product ventures.
Export sales of home furnishings products were $5.8 million in 1994 as
compared with $7.1 million in 1993. Export sales were impacted by poor
economic conditions in European markets.
Total Company selling and administrative expenses were $77.8 million, or
9.7% of net sales, for 1994 as compared with $73.3 million, or 9.5% of net
sales, for 1993. Expenses in 1994 were impacted by higher salary and benefit
costs and costs associated with expansion initiatives.
Interest expense for 1994 increased $1.0 million compared to 1993,
primarily the result of a $.4 million interest charge on the settlement of 1990
and 1991 income taxes by the Internal Revenue Service, higher interest rates and
additional borrowings associated with expansion initiatives.
Income taxes as a percentage of taxable income was 35.6% in 1994 compared
with 37.6% in 1993. The 1993 rate was higher primarily as the result of the one
time impact on deferred taxes of a federal tax rate increase. Both periods
reflect tax benefits resulting from operation of the Company's foreign sales
corporation.
FIFTY-TWO WEEKS ENDED JANUARY 2, 1994 COMPARED WITH FIFTY-THREE WEEKS ENDED
JANUARY 3, 1993
Following a U.S. cyclical recovery from mid-1991 through the end of 1992,
the rate of growth in the domestic softgoods sector began to decline and
retailers and softgoods manufacturers began to report mixed results during 1993.
Despite these general economic conditions, Cone had record sales and income from
continuing operations in 1993. In the apparel fabrics segment, sales were up
substantially, primarily as a result of growth in denims and flannel shirtings.
The Company also benefited from expanding apparel fabrics export sales. Home
furnishings segment sales increased because of sales growth at Carlisle
Finishing, arising primarily from market share gains, and the Company's real
estate division, Cornwallis Development Co.
Net sales for 1993 were $769.2 million, an increase of $63.8 million, or
9.0% from 1992 net sales of $705.4 million. Gross profit (net sales less cost of
sales and depreciation) as a percentage of net sales was 20.7% for both 1993 and
1992. Income from operations increased 9.0% to $85.6 million for 1993. The
Company's 1993 net income was $49.6 million, or $1.68 per share of Common Stock
after preferred dividends. Net income for 1993 included $2.4 million of
increased taxes resulting from the 1993 change in federal tax rates. The
per-share impact of those increased taxes was $.09.
For comparison, Cone reported net income of $43.4 million, or $1.59 per
share, for 1992, which included an after tax benefit of $2.2 million related to
an income tax refund, a $2.0 million extraordinary expense related to the early
extinguishment of debt, and for the first six months of 1992, outstanding shares
did not include 6.9 million shares issued in the Company's mid-1992 initial
public offering.
APPAREL FABRICS. Apparel fabrics net sales were $575.8 million for
1993, an increase of 10.7% from 1992. The improved sales resulted from
increased sales volume and, to a lesser extent, higher prices. Average
prices adjusted for product mix changes were up approximately three
percent. Apparel fabrics export sales for 1993 were up 18.8% to $124.9
million, as compared with $105.2 million for 1992.
Operating margins for the apparel fabrics segment were 12.0% of net
sales for 1993 as compared with 13.0% for 1992. Margins as a percent of
sales were down slightly as a result of a shift in mix to lower margin
specialty sportswear
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fabrics and, to a lesser extent, increased depreciation expense. Average
cotton costs were up by approximately two percent for 1993 as compared with
1992.
HOME FURNISHINGS. For 1993, net sales of $193.4 million for the home
furnishings segment increased $8.0 million, or 4.3%, and operating income
increased $3.2 million, or 19.3% , compared with 1992. All product groups
of the home furnishings segment had higher sales in 1993.
Export sales of home furnishings products were $7.1 million in 1993
compared with $8.6 million in 1992. These export sales were impacted by
poor economic conditions in European and Japanese markets.
In 1993, operating margins for the home furnishings segment improved
to 10.1% of net sales compared with 8.8% for 1992. The increase was
primarily the result of improved operating performance at Olympic Products
and higher sales and improved sales mix of real estate operations.
Total Company selling and administrative expenses increased from $67.6
million, or 9.6% of sales, for 1992 to $73.3 million, or 9.5% of sales, for
1993. The increase in expenses was primarily the result of the redeployment of
people previously charged to discontinued lines to support expanding sportswear
and denim businesses, increases in salaries and benefits costs and, to a lesser
extent, expenses associated with the secondary offering in early 1993 of common
stock held by certain institutional shareholders of the Company.
Interest expense for 1993 decreased $4.0 million as compared with 1992
because of reduced borrowing levels and, to a lesser extent, lower interest
rates. For 1993 interest income was $2.1 million lower than 1992 levels because
of the interest associated with an income tax refund in the first quarter of
1992. Other income in 1993 of $.3 million represented the income from the
Company's 20% investment in CIPSA.
Income taxes as a percentage of taxable income was 37.6% in 1993 compared
with 35.3% in 1992. The effective tax rate for 1993 was higher than the previous
year primarily because of the 1993 increase in federal statutory tax rates. Both
periods reflect tax benefits resulting from operations of the Company's foreign
sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal long-term capital sources are a $75 million Note
Agreement with The Prudential Insurance Company of America (the "Term Loan") and
stockholders' equity. Primary sources of liquidity are internally generated
funds, a $80 million Credit Agreement with a group of banks with Morgan Guaranty
Trust Company of New York ("Morgan Guaranty") as Agent Bank (the "Revolving
Credit Facility"), and a $50 million Receivables Purchase Agreement (the
"Receivables Purchase Agreement") with Delaware Funding Corporation, an
affiliate of Morgan Guaranty. The Receivables Purchase Agreement was increased
from $40 million in the second quarter of 1994 and the Revolving Credit Facility
from $60 million in the fourth quarter of 1994. On January 1, 1995, the Company
had funds available of $31.0 million under its Revolving Credit Facility.
The Term Loan is unsecured and bears interest at a fixed annual rate of 8%,
with required principal payments beginning in August 1996 until final maturity
on August 13, 2002. The Revolving Credit Facility is unsecured and provides for
a floating rate of interest based, at the Company's election, on the agent's
base rate, the Certificate of Deposit rate or LIBOR plus a margin determined by
the Company's capital structure, or at a rate determined through a competitive
bid process. The Company intends to repay all borrowings outstanding under the
Revolving Credit Facility, which is scheduled to expire on August 13, 1997, with
a portion of the net proceeds from the sale of the Debentures offered hereby.
See "Use of Proceeds." Amounts repaid under the Revolving Credit Facility will
remain available. Under the Receivables Purchase Facility, which is extendable
to August 13, 1997, the cost of receivables sold by Cone is the commercial paper
rate plus 55 basis points calculated for the period of time from the sale of a
receivable until its payment date. The resulting cost on the sale of receivables
is included in cost of sales.
During 1994, the Company generated $55.3 million in funds from operating
activities, including $59.0 million from net income adjusted for noncash
depreciation and amortization expenses, partially offset by increased working
capital requirements, primarily increases in trade receivables. Major uses of
cash during this period included $37.5 million for capital expenditures, $57.6
million for the acquisition of the assets of the Raytex commission print
operation and $9.6 million for investment in CIPSA and the related joint
venture. Funding came primarily from operating cash flow, the Revolving Credit
Facility, and the additional sale of accounts receivable to support working
capital needs.
During 1993, Cone generated $57.2 million in funds from operating
activities, including $71.0 million from net income adjusted for noncash
depreciation and amortization expenses, partially offset by increased working
capital requirements,
5
primarily resulting from reductions of accounts payable and accrued expenses.
Major uses of cash during this period included $38.7 million for capital
expenditures and $3.1 million for preferred stock dividends. Cone purchased 20%
of CIPSA for approximately $24 million and began construction of the joint
venture denim plant with CIPSA. The investment in the joint venture was $2.3
million for 1993. Funding for these cash uses came primarily from operating cash
flow and cash available at the beginning of the period.
On January 1, 1995, the Company's long-term capital structure consisted of
$126.1 million of long-term debt and $236.9 million of stockholders' equity. For
comparison, at January 2, 1994 the Company had $77.2 million of long-term debt
and $210.0 million of stockholders' equity. Long-term debt (including current
maturities of long-term debt) as a percentage of long-term debt and
stockholders' equity was 35% on January 1, 1995, compared with 27% at January 2,
1994. The Company accounts for investments in unconsolidated affiliated
companies using the equity method on a one quarter delay basis. In December
1994, the Mexican government devalued the peso and allowed it to trade freely
against the U.S. dollar resulting in a substantial decline in value of the peso
versus the U.S. dollar. On January 1, 1995, the peso was trading at 4.94 pesos
per U.S. dollar versus an exchange rate of approximately 3.45 prior to the
devaluation. If an exchange rate of 4.94 had been used in the Company's
financial statements, the currency translation adjustment would have been a $7.8
million (net of income tax benefit) reduction of stockholders' equity at the end
of 1994. The reduction in stockholders' equity is a noncash adjustment.
Accounts receivable on January 1, 1995 were $56.7 million, up from $44.2
million at year-end 1993. At the end of fiscal 1994, the Company had sold $50
million of accounts receivable, an increase of $15 million from the amount sold
at the end of fiscal 1993. Receivables, including those sold pursuant to the
Receivables Purchase Agreement, represented 49 days of sales outstanding at
year-end 1994 compared with 41 days at year-end 1993, as fewer payments were
made in advance of due date.
Inventories on January 1, 1995, were $149.4 million, down $2.7 million from
year-end 1993 levels of $152.1 million.
Capital spending in 1994 was $37.5 million and included expansion and
upgrading of yarn preparation facilities, new weaving machines, and a new fiber
production line at Olympic Products.
Capital spending in 1995 is expected to be $62 million, including $15
million for the new jacquard plant. Other projects include new weaving machines
that replace 1970's vintage weaving machines, additional dyeing capacity to
increase production flexibility, an additional screen printing machine and
approximately $6 million for computers, software and information systems.
Approximately $3.1 million of the budgeted capital expenditures for 1995 had
been committed at year-end 1994. In addition to capital expenditures, the
Company expects to spend approximately $22 million for completion of its
investment in the Mexican joint venture plant.
FINANCIAL OUTLOOK AND STRATEGY
Beginning in 1992, Cone benefited from favorable apparel fabric markets
characterized by increasing prices and volume in both domestic and international
denim markets and the rapid expansion of sportswear fabrics markets. While first
half 1994 sales did not grow due to short-term denim inventory adjustments in
the softgoods pipeline, second half 1994 operations experienced accelerated
growth, and the Company believes that demographic trends and other market
developments continue to present favorable long-term opportunities for growth.
Operating income was lower in 1994 than in 1993 and the Company does not
anticipate improvement in operating income in the first half of 1995. However,
based on apparel fabric order backlogs at the end of fiscal 1994, the Company
expects increased net sales in the first half of 1995.
In addition to the Company's plans to maintain modern manufacturing
facilities through capital reinvestment, the Company has set priorities for the
use of cash flow and debt capacity. Cone's first priority is international denim
manufacturing and marketing opportunities. In 1993, the Company purchased a 20%
ownership in CIPSA, and signed agreements with CIPSA providing for the formation
of a joint venture as described above. Cone's second priority for cash flow and
debt capacity is acquisitions in related home furnishings product lines. The
acquisition of Raytex and Greeff are results of this strategy. The Company also
from time to time reviews and will continue to review acquisitions and other
investment opportunities (some of which may be material to the Company) that
permit Cone to add value through its manufacturing and marketing expertise.
However, the Company currently has no agreement, arrangement or understanding to
make any such acquisition or investment.
Other potential uses of cash include common stock repurchases, the
reduction of outstanding preferred stock, or cash dividends, depending on the
expected benefits to shareholders. On February 17, 1994, the Board of Directors
of the Company authorized the repurchase, from time to time, of up to 2.5
million shares of the Company's outstanding common stock in
6
open market transactions. As of February 1, 1995, 385,400 shares had been
repurchased in open market transactions and future repurchase decisions will be
based on the Company's expected capital structure, alternative investment
opportunities, and the market price of the common stock.
The Company believes that the net proceeds from the sale of the Debentures
offered hereby, together with its internally generated operating funds and funds
available under its existing credit facilities, will be sufficient to meet its
working capital, capital spending, possible stock repurchases, and financing
commitment needs for the foreseeable future.
REGULATORY MATTERS
Federal, state and local regulations relating to the workplace and the
discharge of materials into the environment are continually changing; therefore,
it is difficult to gauge the total future impact of such regulations on the
Company. Existing government regulations are not expected to cause a material
change on the Company's competitive position, operating results or planned
capital expenditures. Cone has an active environmental committee which fosters
protection of the environment and compliance with laws.
LEGAL PROCEEDINGS
In November 1988 certain former employees of the Company instituted a class
action suit against the Company and certain other defendants in which the
plaintiffs ("Plaintiffs") asserted a variety of claims related to the 1983 ESOP
and certain other employee benefit plans maintained by the Company. In March
1992 a judgment in the amount of $15.5 million (including an attorneys' fees
award) was entered against the Company with respect to an alleged promise to
make additional Company contributions to the 1983 ESOP and all claims unrelated
to the alleged promise were dismissed. The Company, the individual defendants
and the Plaintiffs appealed.
On May 6, 1994, the Court of Appeals, sitting EN BANC, affirmed the prior
conclusion of a panel of three of its judges and unanimously reversed the $15.5
million judgment and unanimously affirmed all of the District Court's rulings in
favor of the Company. However, the Court of Appeals affirmed, by an equally
divided court, the District Court's holding that Plaintiffs should be allowed to
proceed on an alternative theory whether, subject to proof of detrimental
reliance, Plaintiffs could establish that a letter to salaried employees on
December 15, 1983 created an enforceable obligation that could allow recovery on
a theory of equitable estoppel. Accordingly, the case was remanded to the
District Court for a determination of whether the Plaintiffs can establish
detrimental reliance creating estoppel of the Company.
Additional proceedings are under way in the District Court on the issue of
detrimental reliance and other issues related to whether the Plaintiffs can
prevail on remand. For that reason, and because of the uncertainties inherent in
the litigation process, it is not possible to predict the ultimate outcome of
this lawsuit. However, the Company intends to continue to defend this matter
vigorously, and it is the opinion of the Company's management that this lawsuit,
when finally concluded, will not have a material adverse effect on the Company's
financial condition.
To secure the judgment on appeal from the District Court to the Court of
Appeals, the Company had deposited in escrow with the trustee of the 1983 ESOP
an $8 million letter of credit and 75,330 shares of Class A Preferred Stock
valued at $7.5 million which subsequently earned dividends of an additional
11,474 shares valued at $1.2 million. The letter of credit was substituted for
an $8 million cash deposit made in April 1992. To record this escrow
transaction, the Company increased outstanding Class A Preferred Stock by $8.7
million and established an offsetting contra stockholders' equity account.
Because the judgment of the District Court was reversed, the escrowed stock
and letter of credit were ordered released by order of the District Court
entered July 22, 1994. Subsequent to the court's order, the stock was redeemed,
the offsetting contra account eliminated and letter of credit terminated. None
of these escrow transactions have had an effect on net income or stockholders'
equity.
The Company is a party to various other legal claims and actions incidental
to its business. Management believes that none of these claims or actions,
either individually or in the aggregate, will have a material adverse effect on
the financial condition of the Company.
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(McGLADREY & PULLEN, LLP logo here)
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
CONE MILLS CORPORATION
Greensboro, North Carolina
We have audited the accompanying consolidated balance sheets of Cone Mills
Corporation and subsidiaries as of January 1, 1995 and January 2, 1994 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended January 1, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cone Mills
Corporation and subsidiaries as of January 1, 1995 and January 2, 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended January 1, 1995 in conformity with generally accepted
accounting principles.
As described in Note 12 to the consolidated financial statements, on
January 3, 1994 the Company changed its method of accounting for postemployment
benefits.
MCGLADREY & PULLEN, LLP
Greensboro, North Carolina
February 10, 1995
F-1
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 1, 1995, JANUARY 2, 1994 AND JANUARY 3, 1993
1994 1993 1992
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net Sales (Note 19)...................................................................... $806,167 $769,230 $705,430
Operating Costs and Expenses:
Cost of sales.......................................................................... 642,472 589,314 540,825
Selling and administrative............................................................. 77,823 73,326 67,554
Depreciation........................................................................... 23,269 20,991 18,553
743,564 683,631 626,932
Income from Operations................................................................... 62,603 85,599 78,498
Other Income (Expense):
Interest income........................................................................ 614 521 2,621
Interest expense....................................................................... (7,924) (6,950) (10,938)
Other income........................................................................... 223 317 --
(7,087) (6,112) (8,317)
Income from Continuing Operations before Income Taxes.................................... 55,516 79,487 70,181
Income Taxes (Note 13)................................................................... 19,764 29,884 24,782
Income from Continuing Operations........................................................ 35,752 49,603 45,399
Gain on Disposal -- Discontinued Operations -- (Net of income tax of $276)
(Note 21).............................................................................. 439 -- --
Income before Extraordinary Item and Cumulative Effect of Accounting Change.............. 36,191 49,603 45,399
Extraordinary Item -- Expenses Related to Early Extinguishment of Debt -- (Net of income
tax benefit of $1,212)................................................................. -- -- (2,009)
Cumulative Effect of Accounting Change for Postemployment Benefits -- (Net of income tax
benefit of $772) (Note 12)............................................................. (1,228) -- --
Net Income............................................................................... $ 34,963 $ 49,603 $ 43,390
Income Available to Common Shareholders (Note 18):
Income from Continuing Operations...................................................... $ 33,064 $ 46,808 $ 40,839
Income before Extraordinary Item and Cumulative Effect of Accounting Change............ $ 33,503 $ 46,808 $ 40,839
Extraordinary Item..................................................................... -- -- (2,009)
Cumulative Effect of Accounting Change................................................. (1,228) -- --
Net Income............................................................................... $ 32,275 $ 46,808 $ 38,830
Earnings Per Share -- Fully Diluted (Note 18):
Income from Continuing Operations...................................................... $ 1.19 $ 1.68 $ 1.67
Income before Extraordinary Item and Cumulative Effect of Accounting Change............ $ 1.20 $ 1.68 $ 1.67
Extraordinary Item..................................................................... -- -- (.08)
Cumulative Effect of Accounting Change................................................. (.04) -- --
Net Income............................................................................... $ 1.16 $ 1.68 $ 1.59
Weighted Average Common Shares and Common Share Equivalents Outstanding -- Fully Diluted
(Note 18).............................................................................. 27,834 27,894 24,470
See Notes to Consolidated Financial Statements.
F-2
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 1995 AND JANUARY 2, 1994
1994 1993
(AMOUNTS IN
THOUSANDS, EXCEPT
SHARE AND PAR VALUE
DATA)
ASSETS
Current Assets:
Cash................................................................................................ $ 1,158 $ 503
Accounts receivable -- trade, less provision for doubtful accounts $3,000 (Notes 2 and 19).......... 56,654 44,175
Inventories (Note 3):
Greige and finished goods........................................................................ 83,377 84,923
Work in process.................................................................................. 15,796 15,968
Raw materials.................................................................................... 19,973 20,612
Supplies and other............................................................................... 30,274 30,621
149,420 152,124
Other current assets................................................................................ 6,007 5,542
Total Current Assets............................................................................. 213,239 202,344
Investments in Unconsolidated Affiliates (Note 4)..................................................... 34,294 26,420
Other Assets (Note 6)................................................................................. 38,803 3,171
Property, Plant and Equipment:
Land................................................................................................ 20,662 20,758
Buildings........................................................................................... 79,418 71,942
Machinery and equipment............................................................................. 284,401 239,846
Other............................................................................................... 30,581 25,799
415,062 358,345
Less accumulated depreciation....................................................................... 177,321 158,669
Property, Plant and Equipment -- Net............................................................. 237,741 199,676
$524,077 $431,611
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable (Note 7).............................................................................. $ 10,700 $ 5,099
Current maturities of long-term debt (Note 9)....................................................... 414 767
Accounts payable -- trade........................................................................... 38,430 26,746
Sundry accounts payable and accrued expenses (Note 8)............................................... 39,881 44,231
Deferred income taxes (Note 13)..................................................................... 28,148 27,295
Total Current Liabilities........................................................................ 117,573 104,138
Long-Term Debt (Note 9)............................................................................... 126,108 77,172
Deferred Items:
Deferred income taxes (Note 13)..................................................................... 36,789 36,652
Other deferred items................................................................................ 6,727 3,615
43,516 40,267
Stockholders' Equity:
Class A Preferred Stock -- $100 par value; authorized 1,500,000 shares; issued and outstanding
383,948 shares; 1993, 465,077 shares -- Employee Stock Ownership Plan (Notes 15 and 20).......... 38,395 46,508
Class A Preferred Stock held in escrow (1993, 81,125 shares) (Notes 15 and 20)...................... -- (8,113)
Class B Preferred Stock -- no par value; authorized 5,000,000 shares (Note 15)...................... -- --
Common Stock -- $.10 par value; authorized 42,700,000 shares; issued and outstanding 27,403,621
shares; 1993, 27,744,783 shares (Notes 15 and 16)................................................ 2,740 2,774
Capital in excess of par............................................................................ 71,354 75,397
Retained earnings................................................................................... 125,771 93,468
Currency translation adjustment..................................................................... (1,380) --
Total Stockholders' Equity....................................................................... 236,880 210,034
$524,077 $431,611
See Notes to Consolidated Financial Statements.
F-3
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 1, 1995, JANUARY 2, 1994 AND JANUARY 3, 1993
CLASS A PREFERRED CLASS A PREFERRED
PARTICIPATING NONVOTING
STOCK STOCK -- ESCROW PREFERRED STOCK COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Balance, December 29,
1991..................... 601,874 $ 60,187 -- $ -- 635,000 $ 635 -- $-- 11,590,456 $1,159
Net Income................ -- -- -- -- -- -- -- -- -- --
Class A Preferred Stock --
Employee Stock Ownership
Plan:
Shares redeemed.......... (274,425) (27,442) -- -- -- -- -- -- -- --
Cash dividends paid...... -- -- -- -- -- -- -- -- -- --
Shares issued (9.70%
dividend on shares
outstanding)........... 56,100 5,610 -- -- -- -- -- -- -- --
Shares issued for partial
funding of 1991
contribution to
Employee Stock
Ownership Plan......... 403 40 -- -- -- -- -- -- -- --
Shares issued to Employee
Stock Ownership Plan
Trustee held in Cone
Mills escrow account... 75,330 7,533 (75,330) (7,533 ) -- -- -- -- -- --
Participating Preferred
Stock
Converted to Common
Stock:
Voting................. -- -- -- -- (511,867) (512 ) -- -- 5,118,669 512
Nonvoting.............. -- -- -- -- (123,133) (123 ) 1,231,327 123 -- --
Common Stock:
6,900,000 common shares
issued in public
offering............... -- -- -- -- -- -- -- -- 6,900,000 690
Options exercised........ -- -- -- -- -- -- -- -- 3,200,550 320
Purchase of common
shares................. -- -- -- -- -- -- -- -- (373,787) (37)
Balance, January 3,
1993..................... 459,282 $ 45,928 (75,330) $(7,533) -- $-- 1,231,327 $ 123 26,435,888 $2,644
Net income................ -- -- -- -- -- -- -- -- -- --
Class A Preferred Stock --
Employee Stock Ownership
Plan:
Cash dividends paid...... -- -- -- -- -- -- -- -- -- --
Shares issued (8.0%
dividend on shares held
in Cone Mills escrow
account)............... 5,795 580 (5,795) (580 ) -- -- -- -- -- --
Nonvoting Common Stock --
converted to Voting
Common Stock............. -- -- -- -- -- -- (1,231,327) (123 ) 1,231,327 123
Common Stock:
Options exercised........ -- -- -- -- -- -- -- -- 100,000 10
Purchase of common
shares................. -- -- -- -- -- -- -- -- (22,432) (3)
Balance, January 2,
1994..................... 465,077 $ 46,508 (81,125) $(8,113) -- $-- -- $-- 27,744,783 $2,774
Net income................ -- -- -- -- -- -- -- -- -- --
Currency translation loss
(net of income tax
benefit of $1,002)....... -- -- -- -- -- -- -- -- -- --
Class A Preferred Stock --
Employee Stock Ownership
Plan:
Cash dividends paid...... -- -- -- -- -- -- -- -- -- --
Shares issued (7.0%
dividend on shares held
in Cone Mills escrow
account)............... 5,679 567 (5,679) (567 ) -- -- -- -- -- --
Shares received from
Employee Stock
Ownership Plan
Trustee -- Cone Mills
escrow account......... (86,804) (8,680) 86,804 8,680 -- -- -- -- -- --
Shares redeemed.......... (4) -- -- -- -- -- -- -- -- --
Common Stock:
Options exercised........ -- -- -- -- -- -- -- -- 21,000 2
Purchase of common
shares................. -- -- -- -- -- -- -- -- (362,162) (36)
Balance, January 1,
1995..................... 383,948 $ 38,395 -- $ -- -- $-- -- $-- 27,403,621 $2,740
CAPITAL IN CURRENCY
EXCESS RETAINED TRANSLATION
OF PAR EARNINGS ADJUSTMENT
<
Balance, December 29,
1991..................... $ 10,731 $10,196 $ --
Net Income................ -- 43,390 --
Class A Preferred Stock --
Employee Stock Ownership
Plan:
Shares redeemed.......... -- (5 ) --
Cash dividends paid...... -- (1,009 ) --
Shares issued (9.70%
dividend on shares
outstanding)........... -- (5,610 ) --
Shares issued for partial
funding of 1991
contribution to
Employee Stock
Ownership Plan......... -- -- --
Shares issued to Employee
Stock Ownership Plan
Trustee held in Cone
Mills escrow account... -- -- --
Participating Preferred
Stock
Converted to Common
Stock:
Voting................. -- -- --
Nonvoting.............. -- -- --
Common Stock:
6,900,000 common shares
issued in public
offering............... 62,792 -- --
Options exercised........ 7,084 -- --
Purchase of common
shares................. (5,380) -- --
Balance, January 3,
1993..................... $ 75,227 $46,962 $ --
Net income................ -- 49,603 --
Class A Preferred Stock --
Employee Stock Ownership
Plan:
Cash dividends paid...... -- (3,097 ) --
Shares issued (8.0%
dividend on shares held
in Cone Mills escrow
account)............... -- -- --
Nonvoting Common Stock --
converted to Voting
Common Stock............. -- -- --
Common Stock:
Options exercised........ 525 -- --
Purchase of common
shares................. (355) -- --
Balance, January 2,
1994..................... $ 75,397 $93,468 $ --
Net income................ -- 34,963 --
Currency translation loss
(net of income tax
benefit of $1,002)....... -- -- (1,380)
Class A Preferred Stock --
Employee Stock Ownership
Plan:
Cash dividends paid...... -- (2,660 ) --
Shares issued (7.0%
dividend on shares held
in Cone Mills escrow
account)............... -- -- --
Shares received from
Employee Stock
Ownership Plan
Trustee -- Cone Mills
escrow account......... -- -- --
Shares redeemed.......... -- -- --
Common Stock:
Options exercised........ 113 -- --
Purchase of common
shares................. (4,156) -- --
Balance, January 1,
1995..................... $ 71,354 $125,771 $ (1,380)
See Notes to Consolidated Financial Statements.
F-4
CONE MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 1, 1995, JANUARY 2, 1994 AND JANUARY 3, 1993
1994 1993 1992
(AMOUNTS IN THOUSANDS)
Cash Flows from Operating Activities:
Net Income.................................................................................. $ 34,963 $ 49,603 $ 43,390
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation.............................................................................. 23,269 20,991 19,952
Employee Stock Ownership Plan expense..................................................... -- -- 1,250
Gain on sale and writedown of property, plant and equipment, net.......................... (2,519) (1,657) (1,670)
Amortization.............................................................................. 777 444 959
Equity in earnings -- unconsolidated affiliate............................................ (223) (317) --
Dividend received -- unconsolidated affiliate............................................. 541 -- --
Change in assets and liabilities, net of acquisition:
Decrease (increase) in trade receivables.................................................. (9,577) 13,182 42,050
Decrease (increase) in inventories........................................................ 5,317 (6,363) (5,013)
Decrease (increase) in other assets....................................................... (2,989) (2,045) 275
Increase (decrease) in accounts payable and accrued expenses.............................. 1,644 (19,299) 14,194
Increase (decrease) in income taxes payable............................................... -- (276) (1,948)
Increase (decrease) in deferred income taxes.............................................. 990 3,771 4,062
Increase (decrease) in other liabilities.................................................. 3,113 (835) (1,661)
Net cash provided by operating activities................................................. 55,306 57,199 115,840
Cash Flows from Investing Activities:
Investments in unconsolidated affiliates.................................................... (9,572) (26,103) --
Acquisition, net of cash acquired*.......................................................... (57,647) -- --
Proceeds from sale of property, plant and equipment......................................... 2,903 4,869 6,423
Capital expenditures........................................................................ (37,494) (38,712) (25,398)
Net cash used in investing activities..................................................... (101,810) (59,946) (18,975)
Cash Flows from Financing Activities:
Net borrowings (payments) -- short-term loans............................................... 5,601 (1,554) 353
Principal payments -- long-term debt........................................................ (47,606) (77,307) (316,655)
Proceeds from long-term debt borrowings..................................................... 94,578 77,746 189,246
Purchase of outstanding capital stock -- Class A Preferred.................................. -- -- (27,442)
Purchase of outstanding capital stock -- Common............................................. (2,869) (358) (5,417)
Proceeds from issuance of capital stock -- Common........................................... 115 535 70,886
Dividends paid -- Class A Preferred......................................................... (2,660) (3,097) (1,009)
Net cash provided by (used in) financing activities....................................... 47,159 (4,035) (90,038)
Net increase (decrease) in cash........................................................... 655 (6,782) 6,827
Cash at Beginning of Period................................................................... 503 7,285 458
Cash at End of Period......................................................................... $ 1,158 $ 503 $ 7,285
* Acquisition, net of cash acquired:
Working capital, other than cash............................................................. $ (1,377)
Property, plant and equipment................................................................ (23,795)
Cost in excess of net assets................................................................. (19,686)
Other assets................................................................................. (14,400)
Long-term debt assumed....................................................................... 1,611
Net cash used to acquire business......................................................... $ (57,647)
Supplemental Disclosures of Additional Cash Flow Information:
Cash payments for:
Interest, net of interest capitalized....................................................... $ 7,703 $ 7,125 $ 11,100
Income taxes, net of refunds................................................................ $ 17,938 $ 23,926 $ 25,011
Supplemental Schedule of Noncash Investing and Financing Activities:
Stock dividend paid -- Class A Preferred Stock.............................................. $ -- $ -- $ 5,610
Contribution to ESOP -- Class A Preferred Stock............................................. -- -- 40
Class A Preferred Stock issued.............................................................. $ -- $ -- $ 5,650
Class A Preferred Stock issued to ESOP trustee -- Cone Mills escrow account................. $ -- $ -- $ 7,533
Stock dividend paid to ESOP trustee for Cone Mills escrow account........................... 567 580 --
Class A Preferred Stock issued.............................................................. $ 567 $ 580 $ 7,533
Class A Preferred Stock received from ESOP trustee and closure of escrow account............ $ 8,680 $ -- $ --
Purchase of outstanding capital stock -- Common through incurrence of accounts payable...... $ 1,323 $ -- $ --
Nonvoting Common Stock issued............................................................... $ -- $ -- $ 123
Common Stock issued......................................................................... -- 123 512
Participating Preferred Stock converted to common stocks.................................... $ 635
Nonvoting Common Stock converted to Voting Common Stock..................................... $ -- $ 123
See Notes to Consolidated Financial Statements.
F-5
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts have been
eliminated.
FISCAL YEAR
The Company's fiscal year ends on the Sunday nearest December 31. The years
ended January 1, 1995, and January 2, 1994, contained 52 weeks. The year ended
January 3, 1993, contained 53 weeks.
INVENTORIES
Substantially all components of textile inventories are valued at the lower
of cost or market using the last-in, first-out (LIFO) method. Nontextile
inventories are valued at the lower of average cost or market. If current
replacement cost had been used for valuing financial statement inventories, that
portion of the inventories based on the LIFO method would have been
approximately $30,000,000 higher at January 1, 1995, and $20,000,000 higher at
January 2, 1994. LIFO inventories valued for financial statement purposes exceed
their income tax basis by approximately $83,000,000 at January 1, 1995, and
$86,000,000 at January 2, 1994.
INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Investments in unconsolidated affiliated companies are accounted for by the
equity method. The Company's equity in earnings and currency translation
adjustments are recorded on a one quarter delay basis.
OTHER ASSETS
Other assets consist primarily of the excess of cost over net assets
acquired and trade names, which are carried at cost less accumulated
amortization. Costs are amortized using the straight-line method over the
estimated useful lives of the related assets, not exceeding twenty years.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost. Depreciation is computed
by the straight-line method for financial reporting purposes.
CAPITAL STOCK REDEEMED
Redemption of capital stock is accounted for by the par value method.
Excess of redemption price over par value for Class A Preferred Stock is charged
to retained earnings. Excess of purchase price over par value for common stock
is charged to capital in excess of par applicable to common shares and to
retained earnings thereafter.
DEFERRED INCOME TAXES
Deferred income taxes are provided on the difference between the financial
reporting and the income tax basis of assets and liabilities, principally
inventories, and property, plant and equipment. Balance sheet classification of
these deferred income taxes is based upon the classification of the related
assets or liabilities that created the temporary differences and does not
necessarily reflect the expected timing of the reversals.
NOTE 2. SALE OF ACCOUNTS RECEIVABLES
On August 11, 1992, the Company entered into an agreement with the
subsidiary of a major financial institution, which allows the sale without
recourse of up to $40 million of an undivided interest in eligible trade
receivables. This agreement was amended on June 30, 1994, which made the
agreement extendable to August 1997 and allowed the sale of up to $50 million in
eligible trade receivables. The Company acts as an agent for the purchaser by
performing record keeping and collections function of receivables sold. The cost
of receivables sold by the Company is the commercial paper rate plus 55 basis
points calculated for the period of time from the sale of a receivable until its
payment date. The resulting cost on the
F-6
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. SALE OF ACCOUNTS RECEIVABLES -- Continued
sale of receivables is included in cost of sales. Accounts receivable is shown
net of $50 million sold at January 1, 1995 and net of $35 million sold at
January 2, 1994 under this agreement. Cash flows provided by operating
activities for the years 1994, 1993 and 1992 include the sale of accounts
receivable of $15 million, $11 million and $24 million, respectively.
NOTE 3. INVENTORY LIQUIDATIONS
During 1994, 1993 and 1992, certain inventory quantities were reduced,
resulting in a liquidation of LIFO inventory layers carried at lower costs
prevailing in prior years. The effect of these liquidations increased net
earnings by $218,000 in 1994, $303,000 in 1993 and by $1,076,000 in 1992.
NOTE 4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
On June 25, 1993, the Company purchased a 20% ownership in Compania
Industrial de Parras S.A., ("CIPSA"), the largest denim manufacturer in Mexico.
Cost of the initial investment was approximately $24 million. During the fourth
quarter of 1994, CIPSA elected to increase capital through the sale of
additional shares of capital stock, and the Company retained its 20% ownership
level by an additional investment of $6.7 million. The Company accounts for this
investment by the equity method.
The summarized unaudited financial information of CIPSA (100% basis), as
adjusted for purchase accounting, is set forth below:
Financial Information:
QUARTER ENDED
YEAR ENDED SEPT. 30,
SEPT. 30, 1994 1993
(AMOUNTS IN THOUSANDS)
Income statement data
Net sales.................................................................................... $ 90,648 $ 23,128
Gross profit................................................................................. 17,025 5,669
Net income................................................................................... 1,114 1,584
Company's equity in net income............................................................... 223 317
SEPT. 30,
SEPT. 30, 1994 1993
(AMOUNTS IN THOUSANDS)
Balance sheet data
Current assets............................................................................... $ 70,310 $ 70,311
Noncurrent assets............................................................................ 178,573 87,657
Current liabilities.......................................................................... 109,409 13,282
Noncurrent liabilities....................................................................... 30,242 24,121
Net assets................................................................................... 109,232 120,565
Company's equity in net assets............................................................... 21,847 24,113
On January 1, 1995, the carrying value of this investment exceeded by
approximately $9.2 million the Company's share in CIPSA's net assets calculated
using U.S. generally accepted accounting principles before application of
purchase accounting. Approximately $2.4 million of the excess relates to
differences between historical costs and fair market values of CIPSA's property,
plant and equipment. The remainder is the excess of cost over net assets
acquired, net of accumulated amortization, of approximately $6.8 million which
is being amortized over a life of 25 years by the straight-line method.
The Company has also signed agreements dated June 25, 1993, with CIPSA
providing for the formation of a joint venture company to build and operate a
world-class denim manufacturing facility in Parras, Mexico. The partners plan to
invest a total of approximately $50 million, with each partner providing 50% of
this investment. The joint venture has signed a credit agreement with a Mexican
bank for approximately $63 million of debt financing. This debt is not
guaranteed by Cone Mills Corporation or CIPSA. Expenditures on the joint venture
began in the third quarter of 1993 and as of January 1, 1995 the Company had
invested $5.0 million.
F-7
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES -- Continued
In December 1994, the Mexican government devalued the peso and allowed it
to freely trade against the U.S. dollar resulting in a substantial decline in
value of the peso versus the U.S. dollar. On January 1, 1995, the peso was
trading at 4.94 pesos per U.S. dollar versus an exchange rate of approximately
3.45 prior to the devaluation. If an exchange rate of 4.94 had been used in the
Company's financial statements, the currency translation adjustment would have
been a $7.8 million (net of income tax benefit) reduction of stockholders'
equity at the end of 1994.
NOTE 5. ACQUISITION
On December 2, 1994, the Company completed the closing of the acquisition
of substantially all of the assets of M.P.M. Transportation, Inc., successor by
merger with Golding Industries, Inc. Golding was merged into M.P.M.
Transportation, Inc. as of the day immediately preceding the closing. Golding
conducted a commission printing operation in Marion, South Carolina that was
also known as the Raytex Division ("Raytex"). Raytex prints primarily wide
fabrics used in home furnishings, including comforters and bedspreads. The
assets purchased consist primarily of a printing plant and related real
property, equipment, inventories and receivables.
The acquisition was accounted for using the purchase method. The purchase
price was approximately $63.6 million, consisting of cash in the amount of $57.6
million and assumption of net liabilities of $6.0 million. The excess of the
purchase price over the fair value of net assets acquired was $19.7 million. The
fair value of net assets acquired included other intangible assets of $14.4
million.
Raytex's results of operations have been included in the 1994 consolidated
financial statements from date of acquisition. The unaudited proforma results of
operations for the fiscal years 1994 and 1993, assuming the acquisition occurred
as of the beginning of the respective periods, follows:
1994 1993
(AMOUNTS IN
THOUSANDS, EXCEPT
SHARE DATA)
Net sales............................................................................................. $845,915 $818,495
Income before cumulative effect of accounting change.................................................. 37,902 50,126
Net income............................................................................................ 36,674 50,126
Earnings per common share -- fully diluted:
Income before cumulative effect of accounting change................................................ $ 1.27 $ 1.70
Net income.......................................................................................... 1.22 1.70
NOTE 6. OTHER ASSETS
Other assets consist of the following:
1994 1993
(AMOUNTS IN
THOUSANDS)
Excess of cost over net assets acquired............................................................... $ 19,863 $ 177
Trade names........................................................................................... 14,317 17
Other intangible assets............................................................................... 6,838 3,875
$ 41,018 $ 4,069
Less accumulated amortization......................................................................... (2,567) (1,788)
Net intangible assets............................................................................... $ 38,451 $ 2,281
Other assets.......................................................................................... 352 890
Total other assets.................................................................................. $ 38,803 $ 3,171
F-8
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7. NOTES PAYABLE
The Company's real estate subsidiary had unsecured notes payable
outstanding of $8,700,000 and $5,099,000 for 1994 and 1993, respectively. These
funds are borrowed pursuant to a $15,000,000 bank credit agreement with interest
rates, at the borrower's option, of LIBOR plus 2% or the prime rate. The
availability of funds under this credit agreement is based upon capital invested
in real estate inventory. At January 1, 1995, the Company also had outstanding
unsecured notes payable of $2,000,000 at an interest rate of 6.65%.
NOTE 8. SUNDRY ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Sundry accounts payable and accrued expenses consist of the following:
1994 1993
(AMOUNTS IN
THOUSANDS)
Accrued salaries, wages and commissions................................................................. $14,414 $15,062
Checks issued in excess of deposits..................................................................... 10,811 12,185
Other................................................................................................... 14,656 16,984
$39,881 $44,231
NOTE 9. LONG-TERM DEBT
Long-term debt consists of the following:
JANUARY 1, 1995
CURRENT
TOTAL MATURITY LONG-TERM
(AMOUNTS IN THOUSANDS)
8% Senior Note............................................................................. $ 75,000 $ -- $ 75,000
Revolving Credit Agreement................................................................. 49,000 -- 49,000
Capital Lease Obligation................................................................... 1,610 155 1,455
Industrial Revenue Bonds................................................................... 757 224 533
Other...................................................................................... 155 35 120
$126,522 $414 $126,108
JANUARY 2, 1994
CURRENT
TOTAL MATURITY LONG-TERM
(AMOUNTS IN THOUSANDS)
8% Senior Note............................................................................. $ 75,000 $ -- $ 75,000
Revolving Credit Agreement................................................................. -- -- --
Industrial Revenue Bonds................................................................... 1,231 474 757
Other...................................................................................... 1,708 293 1,415
$ 77,939 $767 $ 77,172
Financing arrangements effective August 13, 1992 include a ten year $75
million 8% Senior Promissory Note and a three year $60 million Revolving Credit
Agreement. On November 18, 1994, the Revolving Credit Agreement was amended to
$80 million and extended to August 13, 1997. Annual principal payments of $10.7
million are required by the Senior Note, beginning August 1996, with the
remaining principal amount due August 2002. Borrowings under the Revolving
Credit Agreement are at floating rates, determined by either the prime rate, CD
Rate, or LIBOR, at the Company's option, plus a margin determined by the
Company's capital structure or through a competitive bid. On January 1, 1995,
the Company had borrowings under the Revolving Credit Agreement at interest
rates ranging from 6.19% to 6.63%.
F-9
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9. LONG-TERM DEBT -- Continued
The financing agreements contain certain covenants regarding the operations
and financial condition of the Company. The Company was in compliance with all
loan covenants on January 1, 1995. The total amount of unused capacity under the
Revolving Credit Agreement at January 1, 1995, was $31 million.
In December of 1994, the Company assumed a capital lease obligation of $1.6
million in connection with the acquisition of substantially all of the assets of
Golding Industries, Inc. Golding entered into this lease in June of 1994 with a
lease term of five years and an effective interest rate of 10.27%. Equipment
with a net book value of $3.6 million secures the lease and is included in
property, plant and equipment. Aggregate future minimum lease payments of $2.0
million consist of the present value of mininum payments of $1.6 million and
interest expense of $.4 million. Future minimum capital lease payments are:
1995, $237,000; 1996, $472,000; 1997, $472,000; 1998, $472,000; and 1999,
$355,000.
The Company's industrial revenue bond obligations are at interest rates
ranging from 70% to 84% of prime rate and have maturities through 1999.
The Company also has a long-term obligation of $155,000 at 7% per annum
with maturities through 1998.
Annual maturities of long-term debt, excluding the capital lease
obligation, for each of the next five fiscal years are:
1995................................................................................... $ 259,000
1996................................................................................... 10,901,000
1997................................................................................... 59,878,000
1998................................................................................... 10,881,000
1999................................................................................... 10,850,000
NOTE 10. RETIREMENT PLANS
The Company maintains noncontributory defined benefit pension plans
covering substantially all employees. The plan covering salaried employees
provides pension benefits based on years of service and average compensation for
the highest five consecutive years during the last ten years of service. Plans
covering hourly employees and long distance drivers provide benefits based on
compensation for each year of service. Pension expense related to these plans
was $4,100,000 in 1994, $2,445,000 in 1993 and $1,807,000 in 1992. The Company's
funding policy is to make annual contributions of amounts that are deductible
for income tax purposes. Assets of the pension plans are primarily invested in
fixed income securities consisting of bond funds and short-term money market or
cash equivalent funds.
Net periodic pension costs for 1994, 1993, and 1992 included the following
components:
1994 1993 1992
(AMOUNTS IN THOUSANDS)
Service cost, benefits earned during period...................................................... $2,144 $1,284 $1,194
Interest cost on projected benefit obligation.................................................... 1,752 1,180 686
Actual loss (return) on assets................................................................... 93 (571) (262)
Net amortization and deferral.................................................................... 111 552 189
$4,100 $2,445 $1,807
Assumptions used in determining the periodic pension cost of the pension
plans are as follows:
1994 1993 1992
Discount rate.................................................................................... 7.5% 8.5% 8.5%
Average rate of increase in compensation levels.................................................. 4.0 4.0 4.5
Expected long-term rate of return on assets...................................................... 8.5 9.0 8.0
F-10
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10. RETIREMENT PLANS -- Continued
The following table sets forth the pension plans' funded status and amounts
recognized in the Company's consolidated balance sheets at January 1, 1995 and
January 2, 1994:
1994 1993
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
(AMOUNTS IN THOUSANDS)
Actuarial present value of accumulated benefit obligation -- vested
portion............................................................ $ 9,449 $ 4,511 $ 5,415 $ 2,472
Actuarial present value of accumulated benefit obligation --
nonvested portion.................................................. 1,261 174 649 20
Accumulated benefit obligation -- total.............................. 10,710 4,685 6,064 2,492
Additional amounts related to projected compensation levels.......... 12,202 1,068 8,377 133
Total actuarial projected benefit obligation for service
rendered to date........................................... 22,912 5,753 14,441 2,625
Less: Plan assets at fair value...................................... 11,624 1,749 8,168 159
Projected benefit obligation in excess of plan assets................ (11,288) (4,004) (6,273) (2,466)
Unrecognized net actuarial loss, difference in assumptions and actual
experience......................................................... 15,067 1,111 7,879 176
Unrecognized prior service cost (income)............................. (1,164) 651 (543) (28)
Initial unrecognized net liability at date of adoption, being
recognized over 14-16 years........................................ 364 752 512 756
Adjustment to recognize minimum liability through recording an
intangible asset................................................... -- (1,446) -- (734)
Pension related assets (liabilities) included in the consolidated
balance sheets..................................................... $ 2,979 $(2,936) $ 1,575 $(2,296)
Assumptions used in determining the funded status of the pension plans
(shown above) are as follows:
1994 1993
Discount rate................................................................................................... 8.0% 7.5%
Average rate of increase in compensation levels................................................................. 5.0 4.0
Listed below are the Company's five defined contribution plans which cover
substantially all employees.
1. The 1983 Employee Stock Ownership Plan ("ESOP")
2. The Supplemental Retirement Plan ("SRP")
3. The Supplemental Retirement Plan -- Hourly ("SRP Hourly")
4. The Employee Equity Plan ("EEP")
5. The Employee Equity Plan -- Hourly ("EEP Hourly")
The Company discontinued contributions to the ESOP after 1992. The ESOP is
subject to a floor offset arrangement in conjunction with the Company's defined
benefit plans with respect to pension benefits earned for service after 1983.
Under the floor offset arrangement, retirement benefits earned after 1983 under
the Company's three defined benefit pension plans are offset by the actuarial
equivalent pension value of a portion of participants' ESOP accounts.
The 401(k) Program consists of the EEP, EEP Hourly, SRP and the SRP Hourly
plans. Participants of the Program may contribute from 2% to 15% of their annual
compensation to their respective SRP or to their respective EEP, or their
contributions may be divided between the two plans. The Company makes matching
cash contributions of 25% to both SRP plans,
F-11
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10. RETIREMENT PLANS -- Continued
and 50% to both EEP plans. The Company does not match employee contributions in
excess of 6% of the employee's annual compensation.
Expenses for the defined contribution plans are shown below:
1994 1993 1992
(AMOUNTS IN THOUSANDS)
ESOP............................................................................................... $ -- $ -- $1,250
EEP (combined)..................................................................................... 1,090 544 1,174
SRP (combined)..................................................................................... 630 631 1,149
The 1992 EEP and SRP expenses include a special discretionary contribution
made by the Company.
NOTE 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health care benefits to certain retired
employees between the ages of 55 and 65. These employees become eligible for
postretirement health care benefits if they retire after age 55 and have
completed 15 years of service. The plan is contributory, with retiree
contributions and plan design adjusted annually to reflect changes in health
care costs. The Company funds a portion of the actual health care costs.
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," ("FAS 106"), as of the beginning of the 1993
fiscal year. FAS 106 requires accrual of the cost of providing postretirement
benefits during the employees' active service periods. The Company's accumulated
postretirement benefit obligation ("APBO") at the time of adoption was
$4,598,000 and is being amortized to expense over a 20-year transition period.
Prior to 1993, the Company recognized retiree health care expense when the
benefits were paid. The effect of the change in accounting policy was to reduce
net income for 1993 by $405,000.
The periodic expense for postretirement benefits included the following
components:
1994 1993
(AMOUNTS IN
THOUSANDS)
Service cost for benefits earned during the year........................................................... $ 113 $ 188
Interest cost on accumulated benefit obligation............................................................ 197 379
Amortization of the unrecognized net gain.................................................................. (130) --
Amortization of transition obligation...................................................................... 230 230
Total expense....................................................................................... $ 410 $ 797
Postretirement benefit cost recognized in 1992 under the Company's prior
accounting policy was $277,000.
The actuarial and recorded liabilities for postretirement benefits, none of
which have been funded, are as follows:
1994 1993
(AMOUNTS IN
THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees................................................................................................. $ 571 $ 743
Fully eligible active plan participants.................................................................. 703 967
Other active plan participants........................................................................... 1,466 2,242
Total................................................................................................. $2,740 $3,952
Plus unrecognized gain..................................................................................... 2,149 1,080
Less unrecognized transition obligation.................................................................... 4,138 4,368
Accrued postretirement benefit cost................................................................... $ 751 $ 664
F-12
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS -- Continued
For measurement purposes, a 13% annual rate of increase in per capita
health care costs of covered benefits was assumed for 1995, with such rate of
increase gradually declining to 5.5% in 2003. Increasing the assumed health care
cost trend rate by 1 percentage point would increase the accumulated
postretirement benefit obligation at January 1, 1995 by $297,000 and increase
net periodic postretirement benefit expense by approximately $42,000 in 1994.
The accumulated postretirement benefit obligation was computed using an assumed
discount rate of 8% for 1994 and 7% for 1993.
NOTE 12. POSTEMPLOYMENT BENEFITS
The Company provides health care benefits (in excess of Medicare) and life
insurance benefits for certain disabled employees and health care continuation
coverage for former employees as mandated by law. Presently, the Company pays a
portion of the actual costs of these benefits.
The Company adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits", as of the beginning of the 1994 fiscal year. This statement requires
an accrual method of recognizing postemployment benefits rather than recording
an expense when paid. The cumulative effect of this accounting change, included
in first quarter 1994 earnings, resulted in a one-time charge to income of
$2,000,000 and a reduction in net income of $1,228,000. Additional annual
expenses resulting from the implementation of this accounting statement were
insignificant.
NOTE 13. INCOME TAXES
The following tables present the provision for income taxes, the components
of income tax expense from continuing operations, a reconciliation of the
statutory U.S. income tax rate to the effective income tax rate, and the
components and items comprising net deferred income tax liability.
PROVISION (CREDIT) FOR INCOME TAXES (IN THOUSANDS)
1994 1993 1992
Continuing operations........................................................................ $19,764 $29,884 $24,782
Discontinued operations...................................................................... 276 -- --
Extraordinary item........................................................................... -- -- (1,212)
Cumulative effect of accounting change....................................................... (772) -- --
Stockholders' equity, currency translation adjustment........................................ (1,002) -- --
Total provision......................................................................... $18,266 $29,884 $23,570
COMPONENTS OF INCOME TAX EXPENSE FROM CONTINUING OPERATIONS (IN THOUSANDS)
1994 1993 1992
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
Federal..................... $15,928 $1,145 $17,073 $22,303 $3,470 $25,773 $17,447 $3,511 $20,958
State and local............. 2,350 341 2,691 3,810 301 4,111 3,273 551 3,824
Total provision........ $18,278 $1,486 $19,764 $26,113 $3,771 $29,884 $20,720 $4,062 $24,782
RECONCILIATION TO EFFECTIVE TAX RATE FROM CONTINUING OPERATIONS
1994 1993 1992
Statutory U. S. tax rate................................................................................ 35.0% 35.0% 34.0%
State income taxes, net of federal benefit.............................................................. 3.2 3.4 3.6
Tax benefit from foreign sales corporation.............................................................. (2.3) (1.9) (1.4)
Impact on deferred taxes from federal tax rate increase................................................. -- 2.1 --
Other................................................................................................... (0.3) (1.0) (0.9)
Total effective tax rate........................................................................... 35.6% 37.6% 35.3%
F-13
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 13. INCOME TAXES -- Continued
COMPONENTS OF NET DEFERRED INCOME TAX LIABILITY (IN THOUSANDS)
1994 1993 1992
Deferred income tax liabilities.............................................................. $75,391 $75,160 $73,731
Deferred income tax assets................................................................... (10,454) (11,213) (13,555)
Net deferred income tax liability............................................................ $64,937 $63,947 $60,176
No valuation allowance has been provided due to scheduled reversals of
deferred tax liabilities sufficient to offset scheduled reversals of deferred
tax assets.
ITEMS COMPRISING NET DEFERRED INCOME TAX LIABILITY (IN THOUSANDS)
1994 1993 1992
Property, plant & equipment -- principally depreciation...................................... $38,804 $37,538 $37,239
Inventories.................................................................................. 32,313 32,853 31,557
Other -- net................................................................................. (6,180) (6,444) (8,620)
Net deferred income tax liability............................................................ $64,937 $63,947 $60,176
NOTE 14. COMMON STOCK OFFERING AND CONVERSION OF PARTICIPATING PREFERRED STOCK
On June 25, 1992, the Company received net proceeds of $55.2 million upon
consummation of an underwritten public offering for 6,000,000 shares of Common
Stock. Pursuant to exercise by the underwriters of a 900,000 share
over-allotment option, the Company received additional net proceeds of $8.3
million on July 22, 1992.
On June 18, 1992, the effective date of the Company's registration
statement for its public offering, and in accordance with agreements executed by
the Company and each of the holders of its Participating Preferred Stock, all
outstanding shares of Participating Preferred Stock were converted into an
aggregate of 5,118,669 shares of Common Stock and 1,231,327 shares of Nonvoting
Common Stock.
NOTE 15. CAPITAL STOCK
All Class A Preferred Stock is held by the Cone Mills Corporation 1983 ESOP
except shares which were held in escrow and shares held by former participants
who elected to receive shares in a distribution of account balances. Class A
Preferred Stock is nonvoting, except as otherwise required by law, and is senior
in dividend preference to all other classes of capital stock. Class A Preferred
Stock has a liquidation preference senior to all other classes of capital stock
of $100 per share plus accrued and unpaid dividends.
Holders of Class A Preferred Stock are entitled to receive dividends on the
31st day of March of each year from funds legally available therefor when, as
and if declared by the Board of Directors. The dividend rate is established on
March 31 for the succeeding dividend period, and is determined by an independent
investment bank or appraisal firm selected by the Board of Directors, subject to
confirmation by the ESOP trustee. The dividend rate is determined annually, and
is that rate required to make the fair market value of Class A Preferred Stock
equal to its original par value. The dividend rate cannot exceed 13% per annum
or be less than 7% per annum. Dividends on Class A Preferred Stock are
cumulative, but accumulated dividends do not bear interest. Dividend rates for
Class A Preferred Stock were 7.0% for 1995, 7.0% for 1994 and 8.0% for 1993.
Dividends on the Class A Preferred Stock are, at the option of the Board of
Directors, paid in cash or by delivery of shares of the Company's Class A
Preferred Stock, Common Stock or by delivery of other "qualifying employer
securities" of the Company as that term is used, on the date of such delivery,
in Section 407 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (or the corresponding section of any future law) or by a
combination of the foregoing; provided, however, that on the date of delivery
the fair market value of any stock or qualifying employer securities used to pay
dividends shall be equal to or greater than the amount of dividends paid
therewith. All dividends paid to date on the Class A Preferred Stock have been
paid in additional shares of Class A Preferred Stock or cash.
F-14
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15. CAPITAL STOCK -- Continued
Class A Preferred Stock held by the 1983 ESOP may be redeemed, in whole or
in part, at the option of the Company by a vote of the Board of Directors, at a
price equal to the greater of $100 per share or the fair market value thereof,
plus dividends accrued and unpaid thereon to the date fixed for redemption. The
redemption price shall be paid in cash or by delivery of shares of the Company's
Class A Preferred Stock, Common Stock or by delivery of other qualifying
employer securities or a combination of the foregoing, at the Company's option;
provided, however, that on the date of delivery the fair market value of any
stock or other qualifying employer securities used to pay the redemption price
shall be equal to or greater than the redemption price (or portion thereof) paid
therewith. The fair market value of Class A Preferred Stock was determined to be
$99.78 per share at January 1, 1995.
Purchases of Class A Preferred Stock by the ESOP may be necessary to
provide all or part of the pension due under the Company's defined benefit plans
pursuant to the floor offset arrangement in connection with the ESOP and to make
distributions due to retired or terminated employees. The ESOP is obligated to
purchase shares of Class A Preferred Stock from participants and former
participants of these plans in accordance with the terms and conditions of the
plans, the trust agreements and liquidity agreements thereunder. To the extent
the ESOP has insufficient liquidity to make these purchases, it may require the
Company to repurchase shares of Class A Preferred Stock. It is within the
control of the Company to satisfy the liquidity needs of the ESOP through cash
contributions, cash dividends or optional repurchases of the Class A Preferred
Stock.
All outstanding shares of Nonvoting Common Stock were converted to Common
Stock during February, 1993. These shares, owned exclusively by unaffiliated
shareholders, were converted at the rate of one share of Common Stock for each
share of Nonvoting Common Stock. On May 11, 1993, the shareholders approved an
amendment to the Company's Restated Articles of Incorporation which removed
Nonvoting Common Stock as authorized capital stock. At the same time,
Participating Preferred Stock was removed as authorized capital stock.
The Company is authorized to issue Class B Preferred Stock but it has no
Class B Preferred Stock outstanding nor does it have present plans to issue such
shares. The Restated Articles of Incorporation provide that the Board of
Directors may determine the preferences, limitations and relative rights of the
Class B Preferred Stock, including voting rights, which could adversely affect
the voting rights of holders of Common Stock. Any Class B Preferred Stock which
is authorized and issued shall be junior to Class A Preferred Stock in
accordance with the terms of the Restated Articles of Incorporation.
Holders of Common Stock are entitled ratably, share for share, to
dividends, when, as and if declared by the Board of Directors, out of funds
legally available therefor. Common Stock is junior to Class A Preferred Stock
with respect to dividend preference and may be junior to Class B Preferred Stock
depending upon the relative preferences, limitations and relative rights the
Board of Directors may determine upon issuance of such Class B Preferred Stock.
The Common Stock is junior in liquidation preference to the Class A
Preferred Stock and may be junior to the Class B Preferred Stock depending upon
the relative preferences, limitations and rights the Board of Directors may
establish upon issuance of Class B Preferred Stock. After payment in liquidation
has been made to the senior capital stock, the remaining assets of the Company
would be distributed pro rata among the holders of Common Stock equally on a per
share basis. Holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of holders of Common Stock.
NOTE 16. STOCK OPTION PLAN
The Company's 1984 Stock Option Plan provides for the granting of options
to purchase 5,000,000 shares of Common Stock; such options may be incentive
stock options or nonqualified stock options. All of the options granted have
been nonqualified stock options with a term of ten years, and such grants
included income tax reimbursement in accordance with the terms of the plan.
Options are exercisable on a cumulative basis, at a rate of 20% per year
beginning in the year of grant. No additional grants will be made under the 1984
Plan.
The Company has in effect the 1992 Stock Option Plan that permits the
granting of options to purchase up to 2,000,000 shares of Common Stock. This
plan is substantially identical to the 1984 Stock Option Plan. On February 18,
1993, incentive stock option grants to purchase 500,000 shares of Common Stock
at $15.625 per share were made. On November 9, 1994, nonqualified stock option
grants to purchase 410,000 shares of common stock at $12.00 per share were made.
The 1993 and
F-15
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 16. STOCK OPTION PLAN -- Continued
1994 option grants have a term of ten years and are exercisable, on a cumulative
basis, at a rate of 20% in each twelve month period, beginning six months after
the date of grant; however, the 1994 options provide that no more than fifty
percent (50%) of the shares granted can be exercised in any one calendar year.
The 1994 nonqualified option grants have the income tax benefit reimbursement
feature.
On May 10, 1994, the shareholders approved the Company's 1994 Stock Option
Plan for non-employee directors which allows the grant of options to purchase an
aggregate of 100,000 shares of common stock. A grant of one thousand (1,000)
shares is issued on the fifth business day after each annual meeting to each of
the non-employee directors. The option price is the last reported sale price on
the New York Stock Exchange composite tape on the date of grant. Options granted
under the Plan are nonqualified stock option grants with a term of seven years.
Grants of 6,000 shares were made on May 17, 1994, at $12.875 per share.
A summary of activity under the plans follows:
1984 Stock Option Plan:
Option price per share............................................ $ 5.25 $ 6.50
Outstanding at 1/3/93............................................. 190,200 111,800
Canceled.......................................................... (3,000) --
Exercised......................................................... (92,000) (8,000)
Outstanding at 1/2/94............................................. 95,200 103,800
Exercised......................................................... (17,000) (4,000)
Outstanding at 1/1/95............................................. 78,200 99,800
1992 Stock Option Plan:
Option price per share............................................ $ 15.625 $ 12.00
Granted 2/18/93................................................... 500,000
Outstanding 1/2/94................................................ 500,000
Granted 11/9/94................................................... 410,000
Canceled.......................................................... (8,000) --
Outstanding at 1/1/95............................................. 492,000 410,000
1994 Stock Option Plan:
Option price per share............................................ $12.875
Granted 5/17/94................................................... 6,000
Outstanding at 1/1/95............................................. 6,000
Options exercisable at 1/1/95..................................... 78,200 45,900 196,800 -- 6,000
NOTE 17. LEASES, COMMITMENTS AND REPAIRS AND MAINTENANCE
The Company has various leases accounted for as operating leases. Rent
expense was $ 5,132,000, $5,053,000 and $4,465,000 for 1994, 1993, and 1992,
respectively. Future minimum rental payments required under lease agreements are
$4,289,000 for 1995, $3,755,000 for 1996, $2,268,000 for 1997, $1,911,000 for
1998, $1,550,000 for 1999 and thereafter $1,431,000. Aggregate future minimum
rental payments total $15,204,000. Commitments for improvements of and additions
to property, plant and equipment were approximately $3,100,000 at January 1,
1995. Operating costs and expenses include repairs and maintenance costs of
$34,622,000, $34,680,000 and $32,239,000 for 1994, 1993 and 1992, respectively.
F-16
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 18. EARNINGS PER SHARE
1994 1993 1992
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Income from continuing operations........................... $35,752 $35,752 $49,603 $49,603 $45,399 $45,399
Less: Class A Preferred dividends........................... (2,688) (2,688) (2,795) (2,795) (4,560) (4,560)
Adjusted income from continuing operations.................. 33,064 33,064 46,808 46,808 40,839 40,839
Gain on disposal -- discontinued operations................. 439 439 -- -- -- --
Adjusted income before extraordinary item and cumulative
effect of accounting change............................... 33,503 33,503 46,808 46,808 40,839 40,839
Extraordinary Item.......................................... -- -- -- -- (2,009) (2,009)
Cumulative effect of accounting change...................... (1,228) (1,228) -- -- -- --
Adjusted net income......................................... $32,275 $32,275 $46,808 $46,808 $38,830 $38,830
Weighted average common shares outstanding.................. 27,728 27,728 27,694 27,694 19,421 19,421
Common share equivalents from assumed exercise of
outstanding options, less shares assumed
repurchased............................................... 106 106 192 200 4,864 5,049
Weighted average common shares and common share equivalents
outstanding............................................... 27,834 27,834 27,886 27,894 24,285 24,470
Earnings per common share and common share equivalent:
Income from continuing operations......................... $ 1.19 $ 1.19 $ 1.68 $ 1.68 $ 1.68 $ 1.67
Income before extraordinary item and cumulative effect of
accounting change...................................... $ 1.20 $ 1.20 $ 1.68 $ 1.68 $ 1.68 $ 1.67
Extraordinary item........................................ -- -- -- -- (.08) (.08)
Cumulative effect of accounting change.................... (.04) (.04) -- -- -- --
Net income................................................ $ 1.16 $ 1.16 $ 1.68 $ 1.68 $ 1.60 $ 1.59
Primary and fully diluted earnings per share have been computed by dividing
the net earnings available to common stockholders by the sum of the weighted
average common shares and common share equivalents outstanding.
Common shares issued June 18, 1992 have been included from date of issue.
NOTE 19. SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates in two major segments within the textile industry:
Apparel Fabrics and Home Furnishings. The Company designs, manufactures and
markets Apparel Fabrics including denim in various styles, finishes and weights,
yarn-dyed and chamois flannel shirting fabrics, printed fabrics and synthetic
sportswear fabrics. The Home Furnishings segment consists of the design and
distribution of decorative fabrics for the home furnishings industry, and
decorative fabrics commission dyeing, printing and finishing services. This
segment also includes polyurethane foam products, batting, cushions, carpet
padding, and the distribution of furniture hardware. For reporting purposes,
real estate operations are included in the Home Furnishings segment.
The Company has no foreign operations. Sales to unaffiliated foreign
customers, principally in Europe, were 17.6% of sales from continuing operations
in 1994, 17.2% in 1993 and 16.1% in 1992. Cone has one unaffiliated customer
which accounted for more than 10% of consolidated sales from the Apparel Fabrics
segment. Sales to this customer, as a percentage of sales from continuing
operations, were 33.9% in 1994, 35.3% in 1993 and 37.9% in 1992. At January 1,
1995, this customer had an outstanding accounts receivable balance with the
Company of approximately $17.9 million. The Company has not incurred any losses
in past years related to this customer's accounts receivable.
F-17
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 19. SEGMENT INFORMATION AND MAJOR CUSTOMERS -- Continued
Operating profit for each segment is total revenue less operating expenses
applicable to that segment. General corporate expenses, interest, income taxes,
gains from discontinued operations, extraordinary items and cumulative effect of
accounting changes are not included in segment operating income. General
corporate expenses include certain executive officers salaries, legal expenses,
bank fees and charitable contributions. Intersegment sales and transfers are
considered insignificant. Corporate assets include cash, administrative
facilities, deferred charges, and miscellaneous receivables.
Segment Information
The Company operates in two major industry segments: products for apparel
and home furnishings. Sales, operating income, identifiable assets, depreciation
and capital expenditures for these segments are as follows:
1994 1993 1992
(AMOUNTS IN THOUSANDS)
Sales
Apparel................................................................................ $600,477 $575,800 $520,019
Home Furnishings....................................................................... 205,690 193,430 185,411
Total............................................................................... $806,167 $769,230 $705,430
Operating Income
Apparel................................................................................ $ 47,498 $ 68,828 $ 67,382
Home Furnishings....................................................................... 18,970 19,470 16,317
66,468 88,298 83,699
General corporate expenses............................................................... 3,865 2,699 5,201
Interest expense -- net.................................................................. 7,310 6,429 8,317
Other income............................................................................. (223) (317) --
10,952 8,811 13,518
Income from continuing operations before income taxes.................................... $ 55,516 $ 79,487 $ 70,181
Operating Margin
Apparel................................................................................ 7.9% 12.0% 13.0%
Home Furnishings....................................................................... 9.2 10.1 8.8
Total............................................................................... 8.2% 11.5% 11.9%
Identifiable Assets
Apparel................................................................................ $324,223 $295,832 $268,872
Home Furnishings....................................................................... 182,510 113,780 104,039
Corporate.............................................................................. 17,344 16,227 20,888
Discontinued Operations................................................................ -- 5,772 8,149
Total............................................................................... $524,077 $431,611 $401,948
Depreciation
Apparel................................................................................ $ 17,913 $ 16,518 $ 14,634
Home Furnishings....................................................................... 4,122 3,376 2,893
Corporate.............................................................................. 1,234 1,097 1,026
Total............................................................................... $ 23,269 $ 20,991 $ 18,553
Capital Expenditures
Apparel................................................................................ $ 25,234 $ 28,083 $ 17,590
Home Furnishings....................................................................... 9,077 8,927 5,993
Corporate.............................................................................. 3,183 1,702 1,815
Total............................................................................... $ 37,494 $ 38,712 $ 25,398
F-18
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 20. LITIGATION AND CONTINGENCIES
In November 1988, William J. Elmore and Wayne Comer (the "Plaintiffs"),
former employees of the Company, instituted a class action suit against the
Company and Wachovia Bank & Trust Company, N.A. ("Wachovia") and certain current
and former employees of the Company and Wachovia. The suit was brought on behalf
of salaried employees of the Company who were participants in certain Company
retirement plans. The Plaintiffs asserted a variety of claims related to actions
taken and statements made concerning certain employee benefit plans maintained
by the Company.
On March 20, 1992, the United States District Court in Greenville, South
Carolina, entered a judgment finding that the Company had promised to contribute
certain surplus funds (or their equivalent in Company stock) relating to the
overfunding of the Company's pension plans to the 1983 ESOP by December 23,
1985, that such surplus amounted to $69 million, that the Company's actual
contribution totaled approximately $55 million, and that the Company and certain
of its executive officers therefore had breached their fiduciary duties under
the Employee Retirement Income Security Act of 1974 ("ERISA") to certain
participants in the 1983 ESOP. The District Court ordered the Company to pay to
the 1983 ESOP for the benefit of plan participants, both salaried and hourly,
the sum of $14.2 million in cash or the equivalent in Company stock. In
addition, the District Court awarded $3.5 million in attorneys' fees to the
Plaintiffs, $2.2 million of which was to be paid from the sum awarded to the
1983 ESOP. Judgment was entered in favor of the defendants on all remaining
claims except for claims relating to the ESOP contribution.
On March 20, 1992, the Company and the individual defendants appealed the
District Court's judgment against them to the United States Court of Appeals for
the Fourth Circuit. On April 2, 1992, the Plaintiffs appealed the District
Court's judgment to the Court of Appeals insofar as it dismissed certain of
their claims. To secure the judgment on appeal the Company had deposited in
escrow with the trustee of the 1983 ESOP an $8 million letter of credit and
75,330 shares of Class A Preferred Stock valued at $7.5 million which
subsequently earned dividends of an additional 11,474 shares valued at $1.2
million. To record these escrow transactions, the Company increased outstanding
Class A Preferred Stock by $8.7 million. The increase in outstanding Class A
Preferred Stock was offset by a contra stockholders' equity account labeled
"Class A Preferred Stock held in escrow." These escrow account transactions did
not have an effect upon net income or stockholders' equity of the Company.
On May 6, 1994, the Court of Appeals, sitting EN BANC, affirmed the prior
conclusion of a panel of three of its judges and unanimously reversed the $15.5
million judgment and unanimously affirmed all of the District Court's rulings in
favor of the Company. However, the Court of Appeals affirmed, by an equally
divided court, the District Court's holding that Plaintiffs should be allowed to
proceed on an alternative theory whether, subject to proof of detrimental
reliance, Plaintiffs could establish that a letter to salaried employees on
December 15, 1983 created an enforceable obligation that could allow recovery on
a theory of equitable estoppel. Accordingly, the case was remanded to the
District Court for a determination of whether the Plaintiffs can establish
detrimental reliance creating estoppel of the Company.
Additional proceedings are under way in the District Court on the issue of
detrimental reliance and other issues related to whether the Plaintiffs can
prevail on remand. For that reason, and because of the uncertainties inherent in
the litigation process, it is not possible to predict the ultimate outcome of
this lawsuit. However, the Company intends to continue to defend this matter
vigorously, and it is the opinion of the Company's management that this lawsuit,
when finally concluded, will not have a material adverse effect on the Company's
financial condition.
Because judgment of the District Court was reversed, the escrowed stock and
letter of credit were ordered released by order of the District Court entered
July 22, 1994. Subsequent to the court's order, the stock was redeemed, the
offsetting contra account eliminated and letter of credit terminated. None of
these escrow transactions had an effect on net income or stockholders' equity.
F-19
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 21. DISCONTINUED OPERATIONS
The Company adopted a plan to discontinue and liquidate its corduroy and
other bottomweight continuous piece-dyed fabrics product line in December 1991.
During 1992 and 1993 the Company continued to accommodate customers, liquidate
inventory, and collect receivables. Revenues for 1993 and 1992 were $4,814,000
and $62,036,000, respectively. Actual losses for 1993 and 1992 were consistent
with the estimates provided for these years, and no gain nor additional loss was
recognized for these periods. On January 4, 1994, the Company completed the sale
of all remaining assets identified with discontinued operations. Proceeds from
this sale of inventories were $3,500,000 and resulted in net income of $439,000.
This transaction concluded the Company's 1991 Plan for Discontinued Operations.
NOTE 22. FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVES
The Company has estimated the fair value amounts of financial instruments
as required by SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", using market information and appropriate valuation methodologies.
The valuation of long-term debt is based on current rates for similar debt
maturities that the Company expects it could obtain in present financial
markets. It is estimated that the carrying value of all of the Company's
financial instruments, including long-term debt, approximated fair value at
January 1, 1995 and January 2, 1994.
The Company purchases cotton futures for the purpose of managing its raw
material costs. On January 1, 1995, no cotton futures were held by the Company,
and for each of the fiscal years presented gains or losses charged to cost of
sales have been less than $200,000. In addition to cotton, from time to time the
Company hedges foreign currency transactions and interest rates.
F-20
CONE MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 23. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for years 1994 and 1993:
QUARTERS ENDED
APR. 3, JUL. 3, OCT. 2, JAN. 1,
1994 1994 1994 1995
(IN THOUSANDS, EXCEPT PER SHARE)
Net sales.................................................................... $195,919 $201,662 $203,475 $205,111
Gross profit (1)............................................................. 36,536 36,232 33,722 33,936
Income from operations....................................................... 17,583 16,905 14,790 13,325
Income from continuing operations............................................ 10,025 9,847 8,559 7,321
Gain on discontinued operations.............................................. 439 -- -- --
Income before cumulative effect of accounting change......................... 10,464 9,847 8,559 7,321
Cumulative effect of accounting change....................................... (1,228) -- -- --
Net income................................................................... $ 9,236 $ 9,847 $ 8,559 $ 7,321
Per share data (fully diluted):
Income from continuing operations............................................ $ .34 $ .33 $ .28 $ .24
Income before cumulative effect of accounting change......................... $ .35 $ .33 $ .28 $ .24
Net income................................................................... $ .31 $ .33 $ .28 $ .24
Weighted average shares outstanding.......................................... 27,866 27,858 27,853 27,760
Common stock prices*
High....................................................................... 17 1/4 14 5/8 14 7/8 13 1/2
Low........................................................................ 13 1/2 12 12 3/8 11 1/8
QUARTERS ENDED
APR. 4, JUL. 4, OCT. 3, JAN. 2,
1993 1993 1993 1994
(IN THOUSANDS, EXCEPT PER SHARE)
Net sales.................................................................... $195,035 $202,515 $192,644 $179,036
Gross profit (1)............................................................. 41,839 40,320 39,623 37,143
Income from operations....................................................... 21,593 23,365 21,669 18,972
Net income................................................................... $ 12,619 $ 13,668 $ 11,809 $ 11,507
Per share data (fully diluted):
Net income................................................................... $ .42 $ .47 $ .40 $ .39
Weighted average shares outstanding.......................................... 27,877 27,936 27,889 27,911
Common stock prices*
High....................................................................... 19 5/8 19 1/4 18 17 5/8
Low........................................................................ 13 3/8 15 7/8 14 5/8 14 3/8
The number of holders of record of the Company's Common Stock as of
February 23, 1995 was 572.
*New York Stock Exchange Composite Tape.
(1) Net sales less cost of sales and depreciation
No dividends have been declared on Common Stock since 1984 and the Company
anticipates that its earnings for the foreseeable future will be retained for
use in its business and to finance growth. Payment of cash dividends in the
future will depend upon the Company's financial condition, results of
operations, current and anticipated capital requirements, and other factors
deemed relevant by the Company's Board of Directors.
F-21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONE MILLS CORPORATION
(Registrant)
March 1, 1995 By: /s/ JOHN L. BAKANE
JOHN L. BAKANE
EXECUTIVE VICE PRESIDENT